The Options Players are Going Crazy
No, this is not a statement on the mental state of the options crowd, rather it is an observation on the amount of giant put/call volume ratios I am seeing on our Unusual Option Activity data. The Select Sector SPDR Health Care Fund (XLV) has a put/call volume ratio of 320.66 (320.6 puts for every call!), the Select Sector SPDR S&P Metals & Mining ETF (XME) has seen 155.7 puts traded for every call, and RadioShack's (RSH) ratio is a much more subdued 16.38. Now, these are extreme numbers and the underlying stocks see rather light volume on a normal day. However, one figure did catch my eye, the 10.63 put/call ratio boasted by Dow Jones component Merck (MRK: sentiment, chart, options) .
What prompted this influx of put activity? I took a look at the news facing MRK this morning in my daily Early Edge column. That news came courtesy of a Food and Drug Administration decision to halt the initiation of any new clinical trials for Heplisav (MRK's proposed hepatitis B vaccine). This decision was made as safety concerns surfaced when a patient in a Phase III clinical trial contracted Wegener's granulomatosis (a rare cardiovascular disease).
Back to the option data, MRK's high put/call volume ratio gave me reason to check the rest of the data and provided What Caught My Eye today. On a normal day 3,791 MRK options cross the tape. Today, the April 45 put(MRK PI) has seen activity increase nearly 5.5 times the norm, with 10,003 contracts traded thus far. Were these contracts purchased or liquidated?
To truly answer this question we will have to wait and digest the data tomorrow. Don't be surprised if this activity translates into new positions, as the stock is currently positioned under the 45 level. On the other hand, the stock's position also suggests that we may be seeing options players cashing in on their bearish bets against MRK.
Chemically Induced
The options data also gave me reason to take a look at the April open interest configuration for the pharmaceutical firm. What the chart on the right shows is that peak call open interest resides at the 50 level (the large blue line) for MRK while peak put open interest is at the 42.50 level (the largest red line).
The position of peak put open interest in April shows that options players still think that the stock can drop. With MRK trading slightly above $42.57, the existence of out-of-the-money peak put open interest suggests that option speculators believe the stock is going to continue drifting lower. In fact, the site of secondary open interest comes in at the 40 level, which hints that some speculators think the stock will continue to drop.
Taking a Happy Pill
Ahead of today's rather heavy put activity, MRK was the perfect drug for option speculators. The company's Schaeffer's put/call open interest ratio (SOIR) of 0.71 is lower than 88% of those taken during the past 52 weeks. Does the stock's performance justify this near-extreme level of optimism? Let's see.
Analysts are riding the happy train as well when it comes to MRK. According to Zacks, 10 of the 16 analysts following MRK rate it a "strong buy." Should this ultra-bullish bunch issue downgrades, we could see further downside pressure on the Dow components shares.
A Merck-y Technical Picture
The chart on the left shows MRK's weekly relative-strength performance in comparison to the Dow Jones Industrial Average since March 2005. The pharmaceutical producer's relative-strength performance peaked in the middle of this January, but has taken a substantial turn for the worse since. Currently, MRK is trying to rebound from a substantial period of underperformance.
The weekly chart of MRK throughout this time period shows impressive performance and a healthy pullback. From the end of 2005 until the beginning of 2008 the stock enjoyed support from its 10-week and 20-week moving averages. The pullback initiated when the stock hit $60.55 during the week of January 11 has claimed roughly 30% of MRK's value, and has the shares positioned below their once-supportive 10- and 20-week trendlines. The 30% haircut now has the stock searching for support in the 42.50 region (as MRK is trading in said region) and potentially the 40 region further south. Technically, MRK faces an uphill battle.
The Verdict? There is a lot of bullish sentiment on the Street toward MRK. In fact, taking this optimism in conjunction with the stock's recent run of poor performance makes this blue chipper look like a rather enticing bearish contrarian play.
If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.
Want more of my thoughts on the market? Don't like my views and want to see those of my colleagues Andrea, Elizabeth, Jocelynn, or Joe? Make sure to check out our Schaeffer's Daily Market Blog section throughout the trading day.
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